US Treasury Secretary Scott Bessent is attempting to lower long-term borrowing costs in the $32 trillion Treasury market, a move that Bloomberg notes adds uncertainty to the Federal Reserve's interest rate outlook. Bessent's efforts, including accelerated bond buybacks, are reminiscent of the Fed's crisis-fighting "Operation Twist." However, analysts like Krishna Guha of Evercore ISI have described the current plan as a "weak form of Operation Twist" that may have little lasting impact.
Despite Bessent's assurances on Thursday that he possesses a "big toolkit" to address pressures in the government bond market, bond yields moved higher. His initial two-pronged approach, involving accelerated buybacks and public statements, has met with limited success. The Treasury's announcement to at least double its bond buybacks starting in early September, potentially exceeding $4 billion, initially caused yields to tumble, but they quickly rebounded as market skepticism grew.
Market experts are questioning the efficacy of Bessent's current measures, given the immense size of the Treasury market. Several factors are working against the Treasury, including rising competition from corporate bond issuance, attractive yields from other sovereign bonds, increasing term premiums, and a correlation with oil prices fueling inflation fears. The US also faces a challenging fiscal situation with a deficit-to-GDP ratio near 6% and a national debt exceeding $40 trillion, further compounded by ongoing calls for tax cuts and a lack of spending restraint.
If Bessent's strategy fails to bring down bond yields, it could encourage borrowing during a period of elevated inflation, potentially pressuring the Federal Reserve to raise interest rates, according to Fed watchers. Critics, including Thomas Simons of Jefferies, have also raised concerns about the Treasury's communication strategy, arguing that the recent buyback announcement broke with the long-held practice of "regular and predictable" announcements, thus reducing the credibility of official guidance. This lack of clear communication and the perceived hastiness of the decision could give investors more reason to demand higher compensation for holding US debt.
Bessent still has several options, including larger and more frequent buybacks, smaller auctions of longer-dated debt, or changing the maturity composition of outstanding debt. Another possibility is invoking the "Bessent put," using tactical and unpredictable moves to catch short-sellers off guard and create a perception of two-sided risk. However, each option carries risks, and the market is growing increasingly skeptical of the Treasury's ability to manage the situation effectively without clearer, more consistent policy. He plans to meet with Russell Vought to discuss fiscal consolidation to address the ballooning national debt.
